NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Declining Labor Shares and the Global Rise of Corporate Saving

Loukas Karabarbounis, Brent Neiman

NBER Working Paper No. 18154
Issued in June 2012, Revised in November 2012
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, International Finance and Macroeconomics

The stability of the labor share is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined over the last 30 years. This decline was associated with a significant increase in corporate saving, generally the largest component of national saving. We relate the labor share to corporate saving empirically and theoretically using a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and that corporate saving affects macroeconomic allocations. We argue that it is important to study the labor share and corporate saving jointly, and offer a unified explanation for their trends. A global decline in the cost of capital beginning around 1980 induced firms to shift away from labor and toward capital, financed in part with an increase in corporate saving.

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Document Object Identifier (DOI): 10.3386/w18154

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